When Have I Earned Revenue?

Many small and medium-sized businesses use varying basis of accounting depending on their financial reporting requirements. For companies preparing their financial statements in accordance with Generally Accepted Accounting Principles (GAAP), recognizing revenue could become a more complex process with the Financial Accounting Standards Board (FASB) passing their Revenue from Contracts standard. The standard provided a much more specific model for recognizing revenue that what was used in the past. For non-public entities, this takes effect for annual periods beginning after December 15, 2017.

The five steps for recognizing revenue are summarized below:

  1. Identify the contract(s) with the customer.
  2. Identify the performance obligations in the contract.
  3. Determine the transaction price.
  4. Allocate the transaction price to the performance obligations in the contract.
  5. Recognize Revenue when (or as) the entity satisfies a performance obligation.

 

For more guidance on this topic and if/how it applies to your business, please contact Tony Mueller, CPA at tmueller@bwtpcpa.com or 314-576-1350.

Cash vs Accrual Basis Accounting

Which is best for YOUR company?

How does your business maintain your financials? Under the Tax Cuts and Jobs Act, taxpayers are eligible to select their accounting method according to the new limits in tax years beginning after December 31, 2017.

Taxpayers which have an average annual gross receipts that do not exceed $25 million on the 3-tax-year period before the testing year are not required to use the accrual basis of accounting.

Taxpayers which have an average annual gross receipts that do not exceed $25 million and are producers and/or resellers of both real and personal property are exempt from the application of the UNICAP rules (calculation to capitalize certain direct and indirect costs).

Taxpayers that have an average of $25 million or less in annual gross receipts aren’t required to maintain inventories. You may:

  1. Treat inventory as non-incidental materials or supplies (deduct the costs only as they are consumed or used in the business).
  2. Account for inventory using a method that conforms to their available for sale.

 

Most taxpayers generally prefer the cash method over the accrual method because it allows for more flexibility in managing the amount of taxable income in a certain year.

Before making a switch, please contact one of the Certified Public Accountants here at BWTP to determine which method is best to use for your business.

Having Two Sets of Books

Did you realize that some companies actually utilize two sets of books? Companies often have a set of books for income taxes and one to comply with Generally Accepted Accounting Principles (GAAP). There are numerous differences that exist between accounting for income taxes and GAAP.

Examples of items that create differences between taxable income and net income (GAAP) are:

  • Accelerated depreciation for income taxes, particularly using bonus depreciation, Section 179, or Modified Accelerated Cost Recovery Systems (MACRS). Straight-Line depreciation is generally used for GAAP.
  • Penalties or fines (not tax deductible; expensed via GAAP)
  • Political Contributions (not tax deductible; expensed via GAAP)
  • Interest on state or municipal bonds (Exempt from Federal income tax; included in income calculation for GAAP)
  • Amortization of Goodwill (deductible for taxable income; annual impairment testing done for GAAP (assuming the election out of goodwill impairment testing for private companies has NOT been made))
  • Life insurance premiums paid on behalf of an officer or employee when the company is the direct or indirect beneficiary under the policy (not tax deductible; capitalized and expensed via GAAP)

Depending on your company’s reporting requirements and operations, maintaining two sets of books may be appropriate.

For more information on this, please contact Tony Mueller, CPA at tmueller@bwtpcpa.com.

Expensing vs. Capitalizing

De Minimis Safe Harbor Limit

For tax years beginning on January 1, 2016 or later, the IRS has increased the de minimis safe harbor threshold for expensing from $500 to $2,500 per invoice or item for taxpayers without applicable financial statements. This limitation is for purposes for determining whether a particular expense qualifies under safe harbor, they are not intended as a ceiling on the amount you can deduct as a business expense. Items or invoices greater than $2,500 still need to be capitalized and depreciated over their useful lives.

This is an election, not a change, in accounting method. The de minimis safe harbor election needs to be made annually with a timely filed tax return, including extensions. The de minimis safe harbor election does not include amounts paid for inventory or land.

For questions, please contact Justin Work, CPA at 314-576-1350 or jwork@bwtpcpa.com.

Benefits of Utilizing Statement of Cash Flows

GAAP(Generally Accepted Accounting Principles) Net Income is Great, But How are My Company’s Cash Flows?

Chances are your business will utilize the Income Statement and Balance Sheet when analyzing its annual, semi-annual, quarterly, and monthly results. However, the Statement of Cash Flows is an excellent tool as well. It allows financial statement users to follow a reconciliation from net income to your company’s year-end cash balance. Frequently, your company’s results are more accurately reflected in the Statement of Cash Flows, as other statements often contain financial estimates used to calculate accrued revenues and expenses.

Below is a brief synopsis of the three major sections of the Statement of Cash Flows:

Operating Activities:

The ordinary business activities of your company are reconciled in this section. Starting with net income, changes from the beginning balance to the ending balance of current assets and current liabilities are calculated. Non-cash expenses, such as depreciation and amortization, that are line items on the income statement are added back to net cash. In addition, gains and losses from the sale of fixed assets are subtracted out/added back to the net cash from operating activities.

Investing Activities:

The capital expenditures of your company related to noncurrent assets and the related inflows and outflows are detailed in this section. If you company purchases building, equipment, furniture and fixtures, marketable securities, or any other related items, those outflows are detailed here. Cash inflows from the sale of such items is broken out as well.

Financing Activities:

The cash flow activities associated with your company’s long-term debt and equity transactions are detailed here. Owner investment and distribution, net borrowings received from new long-term debt, and payments on any debt are all part of this section.

 

Please contact Tony Mueller at tmueller@bwtpcpa.com or 314-576-1350 if you have any additional comments or questions.